Are you a first-time investor looking to get into the real estate market? Perhaps you’re a veteran with bonds and stocks, but you’ve learned that the real estate market is one of the top investment trends for 2023. No matter what brings you to the market, real estate investment holds many opportunities for success— you just have to find the right strategy for you. Keep reading, and you’ll see what we mean.
Prior to Investment
When it comes to investing in rental properties, you don’t dive in head first. There’s a fair bit of research involved to ensure you have a solid start. For one, you need to know your financial options. You also need to know what locations have good property values and ROIs, and what approach you will take for the property.
It’s a good idea to work with others when you first start. This doesn’t necessarily mean a shared investment— rather, have an investing mentor, work with a financial advisor, talk to local real estate agents, and get legal advice for contracts. You can do all of the above or neither, but you’ll have a firmer foundation with a bit of professional advice. Your decision may also be influenced by the real estate investment strategy you choose.
Choosing Your Approach
While there are many ways to get into real estate, the following strategies are some of the most popular, especially for new investors. Do note we didn’t put these in a specific order; it’s not a matter of which is better, as investment journeys are unique to you.
The BRRRR Method and House Flipping
BRRR stands for Buy, Rehab, Rent, Refinance, Repeat. You start with a less-than-stellar property that has a lot of potential. Its current “As Is” status allows you to buy it below market value, and then you’ll invest in its repair. Some people choose to handle things themselves, going full DIY, but it’s best to call in professionals when it comes to electricity, plumbing, gas, and other dangerous work. Some handymen get their certifications before they get into real estate investment so they can DIY safely. Once the house is up to code and in livable condition, you can start renting it out. Over time you’ll increase your DSCR, and after a little while, you can return to your lender and refinance at a better rate. Then you take the profits from your first property and start on your second. This sounds a lot like house flipping, but there is one key difference: flippers want to sell, whereas this method is to rent.
Syndications and Crowdfunding
These are two very similar passive investment strategies. In them, you pool your money with other investors and go in together on a property. With syndication, you pay a syndicator to manage deals and pass the profit on to you. All investors are accredited, and you want to be careful who you trust. Crowdfunding allows non-accredited investors to join, allowing for a broader range of investors and less initial capital.
Live-In-Then-Rent and House Hacking
These two closely related investment strategies are modified from house flipping. In LitR, you purchase a unit generally a single-family home, and move in while you make repairs. Once the house is ready to rent, you invest in your next property and move out before tenants move in. The main difference with House Hacking is that you don’t move out; instead, you share the property with your tenant.
Financing Your Investment
One of the most important considerations when you get into investments of any kind, let alone real estate, is how you plan to finance your purchases. Once you are an established property manager, you gain access to flexible lenders and deals like Debt-Service Coverage Ratio loans, but new investors have to start elsewhere.
If you plan on getting an investment property loan, you will find most lenders look at your personal credit score and your investment history rather than your personal finances. However, you will likely need a higher down payment to qualify. Real Estate loans often come through “Alternative Lenders”, i.e., not Fannie Mae and not a bank. These lenders look specifically to benefit investors and are not held to the same rules, which can net you more flexibility and better terms.
After you have rented for a while, you accrue what’s called a debt-service coverage ratio. To calculate this, you divide your net operating income by your expenses for the property. A DSCR of 1.25 opens more financial opportunities, acting as both proofs of your experience and potential collateral.
